The current issue of Health Affairs has several articles and medical innovation and the funding of that innovation. (Health Affairs) Two decades ago drugs and medical devices/equipment were backwater categories of health spending, not drawing a lot of attention. Then the branded blockbusters took off and drugs became a major focus for cost control. Specialty drugs, with their often eye-popping price tag, are currently quite controversial. While medical devices haven’t garnered quite the same attention, they also have drawn increased scrutiny for their efficacy relative to cost. And while the cost of these medical products is an issue, they also often represent quantum leaps in the treatment of and outcomes for patients. The new Hepatitis C drugs, for example, actually cure the disease. What is that worth to a patient? What would a cure for diabetes or high blood pressure be worth? So encouraging innovation is important and whether some of our ideologue politicians want to acknowledge it or not, private market incentives are baked into the human soul, and those incentives are what encourage innovation.
One theme of the Health Affairs issue is that there may be an inadequacy of capital to fund innovative products, and that investor reluctance is increasing due to longer development timelines and more reimbursement uncertainty. It has always been hard for some companies to get venture funding. Despite what might be thought, venture capital firms are actually pretty conservative; they tend to go with the herd and they tend to fund management teams that they believe have been successful in the past, regardless of the current product being worked on. So new people and truly different ideas can get overlooked. The reality is that there actually is an excess of capital floating around, investors are going to be surprised in a few years when they don’t get the returns they hoped for. A lot of uncertain ideas are getting funded at very high valuations. Directing capital to the best ideas is not an easy task, and it is very difficult for the people making decisions about where to invest to predict several years out what product is going to make the biggest impact. Don’t feel too sorry for the people trying to start medical device and drug/biotech companies, there is enough capital to fund worthy ideas; the question is whether the worthy ideas can be appropriately identified.